RBI: Morgan Stanley forecasts 2 rate cuts in 2025; cuts inflation prognosis

Kolkata: The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) could cut the policy rates by 25 basis points not only in its upcoming meeting in October but also in December, global brokerage firm Morgan Stanley mentioned in a report. The outlook has been explained by the fact that inflation is low and it could help RBI to exercise the scissors.

The report says retail inflation could average out at 2.4% (year-on-year) in the current financial year, which is a lot lower than the central bank's target of 4% inflation. "... we expect headline CPI to average at 2.4 per cent YoY in F26, allowing the RBI to cut rates by 25bps each in Oct & Dec," Morgan Stanley mentioned in the report. Retail inflation stood at 1.55% in July and 2.07% in August.

Interestingly, SBI Research, the think tank of the economists of the biggest bank of the country SBI, took just the opposite position in a recent report. "With August inflation print a tad higher than the 2 per cent mark, a rate cut in October looks onerous. Even a rate cut in December looks a little difficult if growth numbers for Q1 and Q2 (estimates) are taken into consideration," it said. It justified the opinion of RBI not wielding the scissors by citing the stronger-than-expected growth estimates in Q1 and Q2 of the current year.

"With August inflation print a tad higher than the 2 per cent mark, a rate cut in October looks onerous. Even a rate cut in December looks a little difficult if growth numbers for Q1 and Q2 (estimates) are taken into consideration," said SBI Research.

The decision to hold, cur or raise policy rates is usually contingent upon the interplay of growth and inflation in an economy. Since inflation figures are under control, the country's economic policymakers are keen to push up the rate of growth. Achieving higher growth is all the more significant since the government wants more employment to be generated. Raising consumption is one of the key objectives of the government. The quest to lower interest rates is one of the factors that can bring down the cost of loans, EMIs and raise consumption of goods and services.

Driven by lower food inflation, retail inflation figures for the past seven months have been consistently lower than the RBI's target of 4%. Core inflation -- retail inflation without food and fuel prices -- has also been easing. In order to boost demand by slashing interest rates, RBI has cut Repo Rates by 100 basis points between early February and early June. It left the rate unchanged at 5.5% in its August meeting.

Morgan Stanley reports also mentioned a few other points such as domestic demand getting strong support by the lowering of GST rates. However, the drag in the economy, thanks to the retaliatory 50% tariff imposed by US President Donald Trump has also been stated.